Question & Answer

Will this type of behaviour tend to lead to profit maximisation?

Explain how the holding of a range of assets in people’s portfolios may help to create a more direct link between changes in money supply and changes in aggregate demand.

Will there be any cost to the UK economy from a decline in the demand for exports resulting from a world recession?

Maher Inc. reported income from continuing operations before taxes during 2014 of $790,000. Additional transactions occurring in 2014 but not considered in the $790,000 are as follows. 1. The corporation experienced an uninsured flood loss (extraordinary) in the amount of $90,000 during the year. The tax rate on this item is 46%. 2. At the beginning of 2012, the corporation purchased a machine for $54,000 (salvage value of $9,000) that had a useful life of 6 years. The bookkeeper used straight-line depreciation for 2012, 2013, and 2014 but failed to deduct the salvage value in computing the depreciation base. 3. Sale of securities held as a part of its portfolio resulted in a loss of $57,000 (pretax). 4. When its president died, the corporation realized $150,000 from an insurance policy. The cash surrender value of this policy had been carried on the books as an investment in the amount of $46,000 (the gain is nontaxable). 5. The corporation disposed of its recreational division at a loss of $115,000 before taxes. Assume that this transaction meets the criteria for discontinued operations. 6. The corporation decided to change its method of inventory pricing from average-cost to the FIFO method. The effect of this change on prior years is to increase 2012 income by $60,000 and decrease 2013 income by $20,000 before taxes. The FIFO method has been used for 2014. The tax rate on these items is 40%. Instructions Prepare an income statement for the year 2014 starting with income from continuing operations before taxes. Compute earnings per share as it should be shown on the face of the income statement. Common shares outstanding for the year are 120,000 shares. (Assume a tax rate of 30% on all items, unless indicated otherwise.)

Winans Company uses the lower-of-cost-or-market method, on an individual-item basis, in pricing its inventory items. The inventory at December 31, 2013, included product X. Relevant per-unit data for product X appear below. 2 Estimated selling price $45 Cost 40 Replacement cost 35 Estimated selling expense 14 Normal profi t 9 There were 1,000 units of product X on hand at December 31, 2013. Product X was incorrectly valued at $35 per unit for reporting purposes. All 1,000 units were sold in 2014. Instructions Compute the effect of this error on net income for 2013 and the effect on net income for 2014, and indicate the direction of the misstatement for each year.

What determines the rate of depreciation of capital? What would happen if the rate of depreciation fell?

On a diagram similar to Figure 19.19, trace through the effects of (a) a fall in investment and (b) a fall in the money supply. On what does the size of the fall in national income depend?

In each of the following independent cases, determine the taxpayer’s filing status and the number of dependents the taxpayer is allowed to claim.

Explain the advantage of a swap option to a financial institution that wants to swap fixed payments for floating payments. (LO2)

Will underapplied and overapplied overhead arise under both actual and normal costing? Explain your answer.

Describe the water jet cutting process.

Diane has a job working three-quarter time.  She hired a relative to take care of her two small children so Diane could work.  Do Diane’s child care payments to her relative qualify for the child and dependent care credit in 2024?  Explain.

Give some examples of how governments try to nudge people to help them make better decisions.

Suppose you asked your favorite AI query tool the following question: “Are property taxes that refunded included in gross income for federal income tax purposes?”  The AI tool provided the following response:

If the CPI went up from 150 to 162 over 12 months, what would be the rate of inflation?

Chippewas Inc. has decided to purchase equipment from Central Michigan Industries on January 2, 2014, to expand its production capacity to meet customers’ demand for its product. Chippewas issues an $800,000, 5-year, zero-interest-bearing note to Central Michigan for the new equipment when the prevailing market rate of interest for obligations of this nature is 12%. The company will pay off the note in five $160,000 installments due at the end of each year over the life of the note. Instructions (Round to nearest dollar in all computations.) (a) Prepare the journal entry(ies) at the date of purchase. (b) Prepare the journal entry(ies) at the end of the first year to record the payment and interest, assuming that the company employs the effective-interest method. (c) Prepare the journal entry(ies) at the end of the second year to record the payment and interest. (d) Assuming that the equipment had a 10-year life and no salvage value, prepare the journal entry necessary to record depreciation in the first year. (Straight-line depreciation is employed.)

Archer Construction Company began work on a $420,000 construction contract in 2014. During 2014, Archer incurred costs of $278,000, billed its customer for $215,000, and collected $175,000. At December 31, 2014, the estimated future costs to complete the project total $162,000. Prepare Archer’s journal entry to record profit or loss using (a) the percentage-of-completion method and (b) the completed-contract method, if any.

Cost function using high-low and regression; quality of cost estimates Following are sales and administrative cost data for Big Jack Burgers for four months:  Administrative cost is a mixed cost, and sales is a potential cost driver.   Required (a)          Using the high-low method, create a cost function for administrative costs. (b)          In your own words, explain why the high-low method might not be a good method for estimating the cost function. (c)           Create a scatter plot and add a trend line. After examining the plot, use your judgement to determine whether the cost is fixed, variable, or mixed. (d)          Perform regression analysis to create a cost function for administrative costs. (e)           Can we know for certain that the cost function from part (d) provides a good estimate for next month’s administrative costs? Why or why not? (f)           Discuss whether sales are an economically plausible driver for administration costs for Big Jack Burgers.(a)     Total revenue (TR) instead of quantity (Q) in the cost function because sales is a potential cost driver. Under the high-low method, the cost function is calculated using the highest and lowest values of the cost driver. First, the variable cost is calculated: ($68 333 – $43 333)/($1 132 100 – $632 100) = $25 000/$500 000 = 0.05  or 5% of sales   The fixed cost is determined by substituting the variable cost into one of the high-low data points: $68 333 = F + 5%×$1 132 100 F = $68 333 – $56 605 = $11 728   Thus, the total cost function is: TC = $11 728 + 5%×Sales   (b)        The high-low method uses the most extreme cost driver values, which could be outliers, that is, not represent the cost most of the time. That means that the cost function might not represent the actual cost, on average. Therefore, this cost function might provide poor estimates of future costs. (c)     Chart of data with trend line added by Excel; trend line extended to Y-axis (dashed line) using Word: It appears that the cost is most likely mixed. There is a general downward slope     (variable cost) that appears to meet the intercept enough above zero to suggest a    fixed cost. The upward slope of the line indicates that there are variable costs.   (d)     Following is the regression output. A t-statistic greater than 2 is often interpreted as meaning that the coefficient is significantly different from zero. Notice that the t-statistic for the intercept coefficient is 2.172, but the p-value is greater than 10% at 0.162. Based on the p-value, there is a 16% probability that the intercept (fixed cost) is not different from zero. Because this regression has few observations, the p-value result for the t-statistic is atypical. Additional judgement is required to decide whether it is appropriate to include a fixed cost in the cost function.             Analysis at the account level can be used to increase the understanding of this cost. If this cost pool includes items such as salaries and other fixed costs (insurance, etc.), the regression intercept can be used as an estimate of the fixed costs. Then, the cost function would be TC = $16 800 + 4.5% × sales. Alternatively, analysis at the account level might indicate that there are few fixed costs. In that case, fixed costs are likely to be zero and would be excluded from the cost function. Then, the cost function would be: TC = 4.5% × sales   (e)     Because of unforeseen changes in cost behaviour, a cost function may not provide a good estimate for the next month’s costs. The past costs used for estimation might not be representative, especially because so few observations were used in the estimation. Sales might not be the activity that drives administrative costs. There might be a change in business operations or in the economy that would cause future costs to be different than in the past. There might be a large discretionary component in administrative costs, causing fluctuations in cost that are unrelated to any cost driver.                     (f)      The cons of the high-low method as an estimation technique were discussed in Part B above. If there are only two or three data points, however, the high-low method may be the best option available. This method can be used in cases where there is not enough data to perform regression, and it can be further improved by adopting more representative data points than the highest and lowest values of the cost driver. If there are more data points, regression analysis incorporates all of the observations into the analysis. Therefore, the results rely on more complete information and provide a better estimate, on average. Both methods assume that the cost function is linear and that all data points come from a single relevant range. If these assumptions do not hold, then both methods may be unsuitable for estimating future costs. In addition, both of these methods assume that the data points are representative of future costs. Unusual cost items are assumed to continue in the future, and possible changes in costs such as those described in Part E are ignored.

Compare and contrast the limits on the deduction of interest on home acquisition indebtedness versus home equity loans.  Are these limits consistent with horizontal equity?  Explain.

How is it that the cost of an investment to a firm will exceed the value of the output that the investment will yield? Surely that would make the investment unprofitable. (Clue: the increase in output refers to output over a specific time period, usually a year.)

If the federal government planned to expand the space program, how might this change affect interest rates? (LO1)

On a diagram like Figure A1.8 draw the graphs for the following equations:                      y = –3 + 4x                      y = 15 – 3x

During 2014, Simms Company redeemed $2,000,000 of bonds payable for $1,880,000 cash. Indicate how this transaction would be reported on a statement of cash flows, if at all.

What are some of the methods used to cure adhesives?

Calvin reviewed his canceled checks and receipts this year (2024) for charitable contributions, which included an antique painting and IBM stock. He has owned the IBM stock and the painting since 2005. Calculate Calvin’s charitable contribution deduction and carryover (if any) under the following circumstances. Donee Item Cost FMV Hobbs Medical Center IBM stock $ 5,000 $ 22,000 State Museum antique painting 5,000 3,000 A needy family food and clothes 400 250 United Way Cash 8,000 8,000 a.              Calvin’s AGI is $100,000. b.             Calvin’s AGI is $100,000, but the State Museum told Calvin that it plans to sell the painting. c.              Calvin’s AGI is $50,000. d.             Calvin’s AGI is $100,000 and Hobbs is a nonoperating private foundation. e.              Calvin’s AGI is $100,000, but the painting is worth $10,000.